Citi Currency Analyst: Here's The 'Biggest Political Risk' In The World

The latest CitiFX Strategy Weekly note is out, laying out the big
issues for currency traders right now

There are two sections devoted to politics. One is strictly on
the question of what a Romney win might mean for the US dollar.
The other part is about political risk more broadly.

We view most of the recent price action in G10 FX (with the
possible exception of the USDJPY rally) as being the result of
squaring up ahead of the US election and 18th National Congress
of the Communist Party of China. The biggest political
risk is the potential that the US result won‘t be known due to
the combination of a tight election and re-count/mail-in issues
in swing states.

...there is a chance that things may drag on for hours after the
last poll closes (6.00 GMT, 01.00 EST). In fact, with Ohio
mail-in ballots eligible to be received up until 10 days past the
election and Ohio provisional ballots not to be counted until 11
days past the election, clarity may not come for days. In the
disputed election in 2000, closure did not come until December
12. That election caused a number of swing states to enact
mandatory recount laws for close elections, so Ohio is not the
only state that could conceivably prevent the election from being
decided on schedule. If election results are delayed, presumably
the odds of avoiding the fiscal cliff are reduced. [Any}
resulting worsening of US credit risk would presumably be
accompanied by USD strength in risk-off trading.

Compared to the US, the results of the Chinese power transition
are much easier to predict, but there is room for positive
surprise stemming from the announcement of policy initiatives. In
the event that the US election results in chaos, the expectation
of sidelines announcements of growth-supporting policies by China
may keep financial markets from getting too beared up.